RE:RE:RE:RE:RE:Seeking Alpha Article - CanexusCalgaryrider wrote: I just want to point out that you can be within bank convenants (because they only calculate debt based on secured, bank debt - not convertible debs), but as a consequence still be at the risk of dilution BECAUSE of the debs. And they can meet convenants now, but can they meet them at higher interest rates? 1% higher? 2% higher? We know they have a lot of US denominated debt. It's not implausible that US interest rates are higher next year. Can they survive? If there's risk, expect the banks to have a say as to what they do with that $75M.
With what's going on in the oil patch, where several banks are tremendously exposed, all the banks are riding their clients on much shorter leashes.
With the performance of this management team, both on NATO and recently in chemicals too, I'd have them on a short leash.
They didn't just screw up the project, which was inexusable in and of itself. They screwed up things commercily that constrained the value of the asset (incl. take or pay contracts that were absurd). Theys screwed up on timing and scheduling (risk managment). They screwed up communication to the public about those contracts and both expected and actual performance ["Hey, we're loading 5.5. trains, they just happen to be short ones!, is that relevant?"]
The track record of these clowns is - in a word - poor.
If you're truly convinced this is a double or triple from here, you should be buying more.....but what I hear is that your investment thesis has turned to 'hope'.....yes, a four-letter word. I just don't subscribe to that approach. There are better places to make more money sooner and more reliably.
Calgaryrider; You are assuming that “whatever could go wrong will go wrong”. That is actually a good thing to do but then you need to assess the likelihood that it will actually happen.
You can be sure that the lenders are aware that interest rates “could” go up some time in the future. You can be sure that they were fully aware of CUS.DB.A. I am not aware of anything in the covenants that specifically prevents the redemption of CUS.DB.A.
Canexus and the Lenders have a signed agreement, binding on both parties. Until Canexus is out of compliance they are in compliance and the Lenders can’t change the terms.
The Market speaks and we should listen. The trading on CUS indicates that Market is saying that Canexus has a challenging future. The only reason that I can think of to buy a short dated debenture would be to park some cash in a SAFE place for a few months and collect some interest. The trading on CUS.DB.A indicates that Market views CUS.DB.A as SAFE.
The Market doesn’t always get it right.
Just for the heck of it lets assume that “stuff happens” and Canexus can’t use the Credit Facility to redeem CUS.DB.A for cash. Canexus has options. Not all of them are “catastrophic”.
- Issue Equity (Extremely unlikely)
- Issue a replacement Debenture (a hard sell Highly Unlikely)
- Renegotiate the terms of CUS.DB.A (doable Most Likely)
- Convert CUS.DB.A into shares (very dilutive not good for anybody)
I doubt that I will be telling you anything that you don’t know but there may be some following this discussion that are not familiar with the features of Convertible Debentures.
Most but not all Debentures have a clause that although the Interest has to be paid in cash the Issuer has the right to Convert them into Shares if certain conditions are met. I actually went to SEDAR and dug up the original “Short Form Prospectus” to confirm that CUS.DB.A has that clause and it does. It wasn’t easy. You can find it by going to Canexus’ page on SEDAR and finding the “Final Short Form Prospectus” Dated Sept 21, 2010 page 11.
Payment upon Redemption or Maturity On redemption or at maturity, the Fund will repay the indebtedness represented by the Series III Debentures by paying to the Debenture Trustee in lawful money of Canada an amount equal to the aggregate Redemption Price of the outstanding Series III Debentures which are to be redeemed or the principal amount of the outstanding Series III Debentures which have matured, as the case may be, together with accrued and unpaid interest thereon. The Fund may, at its option, on not more than 60 days and not less than 40 days prior notice and subject to applicable regulatory approval, elect to satisfy its obligation to pay the Redemption Price of the Series III Debentures which are to be redeemed or the principal amount of the Series III Debentures which have matured, as the case may be, by issuing Fund Units to such Debenture holders. Any accrued and unpaid interest thereon will be paid in cash. The number of Fund Units to be issued will be determined by dividing the aggregate Redemption Price of the outstanding Series III Debentures which are to be redeemed or the principal amount of the outstanding Series III Debentures which have matured, as the case may be, by 95% of the Current Market Price on the date fixed for redemption or the maturity date, as the case may be. No fractional Fund Units will be issued on redemption or maturity but in lieu thereof the Fund shall satisfy fractional interests by a cash payment equal to the Current Market Price of any fractional interest. The term “Current Market Price” will be defined in the Indenture to mean the weighted average trading price of the Fund Units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the date of the applicable event. The weighted average trading price will be determined by dividing the aggregate sale price of all Fund Units sold on the TSX during the 20 consecutive trading days by the total number of Fund Units so sold. This kind of event is rare but it does happen.
The way it would likely play out is;
- Canexus announces their intention to “Convert” CUS.DB.A
- The shareholders panic, dump and drive the SP down.
If the SP that the conversion was based on is $1.00 there would be 60m new shares created (very dilutive).
If the SP that the conversion was based on is $0.50 there would be 120m new shares created (highly dilutive).
If the SP that the conversion was based on is $0.25 there would be 240m new shares created (extremely dilutive).
Changing the terms of CUS.DB.A would require that the holders vote 2/3 in favour.
If I was a CUS.DB.A holder (I am not) and I had the choice between accepting new terms that would have a new Maturity date (4 or 5 years out) c/w a much higher Interest rate and a realistic conversion rate or ending up with a “truck full” of CUS shares of dubious value I know what my vote would be.
This would not be an “Ideal’ event for Canexus and the debenture holders but much better for everybody than the alternative.
As I said at the beginning assessing the “worst case scenario” is a good idea regardless of the likelihood of it actually happening.
In my “opinion” the likelihood of CUS.DB.A not being redeemed for cash is EXTREEMLY UNLIKLEY!!
As Always; Do Your Own Due Diligence; It’s Your Money !! PS; I am not sure why I am spending so much time on a company I no longer own shares in. The Q2 results will be Very Interesting and provide more insight in the consequences of selling NATO.